UK sets out approach to global minimum tax implementation

By Doug Connolly, MNE Tax

The UK government on January 11 opened a consultation on how it plans to implement and administer within the UK the OECD model rules on the internationally agreed 15% global minimum tax. The consultation also considers the introduction of a UK domestic minimum tax, as well as potential broader amendments to base erosion and profit shifting (BEPS) measures.

In the consultation document, the government describes how it proposes to translate provisions relating to the application of the minimum tax’s global anti-base erosion (GloBE) rules, the calculation of effective tax rate, reporting and payment, and other issues.

The consultation is open until April 4, running concurrently with OECD work on the commentary to the model rules that were released last month. Following the consultation, the UK government plans to issue draft legislation in the summer.

The government expects to include legislation relating to the GloBE “income inclusion rule” in Finance Bill 2022-23, which would then take effect on April 1, 2023. This is intended to be in line with the OECD Inclusive Framework’s October agreement, which set a timeframe under which jurisdictions are to enact legislation for the global minimum tax in 2022 with the goal for the provisions to take effect in 2023.

The consultation also seeks feedback on the GloBE “undertaxed payments rule,” as well as the potential domestic minimum tax, but it states that these provisions would not take effect before April 1, 2024, at the earliest.

The consultation does not cover the treaty-based “subject to tax rule” under the global minimum tax. The government notes that this rule will require the development of a model treaty provision, which is still under discussion among the OECD Inclusive Framework.

GloBE rules application

The government states that it expects that in most cases the top-up tax attributable to UK multinational groups with respect to foreign entities in low-tax jurisdictions will be charged to the ultimate parent entity in the UK under the income inclusion rule. Once the income inclusion rule is introduced in the UK, UK-based groups will not be subject to the undertaxed payments rule, which foreign jurisdictions might otherwise charge to other group entities if top-up tax was not collected under the income inclusion rule.

In addition to ultimate parent entities, the UK income inclusion rule would also apply to UK-based intermediate parent entities of foreign-headquartered groups located in jurisdictions that have not introduced GloBE rules.

The UK undertaxed payments rule would only apply to UK entities of foreign-headquartered groups and only when top-up tax is due for a foreign entity in the group and that top-up tax is not collected in another jurisdiction under the income inclusion rule.

The consultation states that the UK government plans to implement the rules “as closely to the OECD Model Rules as possible.” It acknowledges that there may be limited areas where adaptations to UK law are necessary, adding, however, that it intends to keep any such adaptations in line with the intentions of the OECD agreement. Nonetheless, the consultation asks – admitting limited room to deviate from the agreed rules – whether the UK should consider not sticking so closely to the OECD rules.

Both the income inclusion rule and undertaxed payments rule would only apply to multinational groups with revenues of more than EUR 750 million. While the OECD agreement allows countries to apply the income inclusion rule to smaller groups in their jurisdiction, the UK government does not intend to do so. However, it asks about different views on this threshold for in-scope entities.

Effective tax rate calculation

Top-up tax applies when a multinational group has profits in a jurisdiction that are taxed below the 15% minimum effective tax rate. In general, the effective tax rate for a jurisdiction is calculated by dividing the group’s aggregate tax in a jurisdiction by its aggregate profit in the jurisdiction.

Constituent entities’ income under the GloBE rules is calculated based on financial accounting profit, with certain adjustments to reconcile important accounting and tax differences. Generally, for entities included in the group’s consolidated financial statements, the income is calculated in accordance with the accounting standard of the ultimate parent entity.

The consultation asks for comments on the adjustments made to accounting profit under the rules and whether the UK legislation could clarify existing uncertainties while still respecting the model rules. The OECD model rules also address valuation of deferred tax liabilities and deferred tax assets, and the consultation asks about how UK legislation could resolve uncertainty around the rules on timing differences.

The government notes that the treatment of tax credits in the OECD model rules depends on their refundability. Generally, tax credits that are refundable within four years are treated like grants and are included in the income of the constituent entity, rather than being treated as tax reductions.

The consultation states that this distinction in the treatment of tax credits will ensure that the UK’s research and development (R&D) expenditure credit will continue to be effective in promoting R&D in the UK. This is because, the government states, the R&D credit will be treated as an addition to income rather than a reduction in tax for purposes of the effective tax rate calculation.

Reporting and payment

There will be a new registration process, the consultation document explains, under which multinational groups in the UK will be required to notify the government that they are in scope of the GloBE rules. The government expects to set the registration deadline at six to nine months from the end of the group’s relevant fiscal year – although it requests views on this timeframe.

The consultation also asks about the method for reporting liabilities under the income inclusion rule or undertaxed payments rule, i.e., whether such reporting should be on the corporate tax return or a GloBE return. The government states that it would prefer to have the data in the GloBE return, but it is still determining the level of information to require in that return.

Given the complexity of the calculation of top-up tax liabilities under the GloBE rules, the government expects that requiring quarterly installments, as are required for corporate income tax, would be challenging. Accordingly, it proposes that GloBE liabilities be paid annually rather than quarterly. It further suggests that the deadline for such annual payments should align with that for corporate tax – that is, nine months from the end of the fiscal year. Nonetheless, it solicits comments on this due date.

Remaining GloBE issues

The government notes that there have been discussions about a simplified effective tax rate calculation based on a multinational group’s country-by-country reporting. The consultation seeks feedback on how such a safe harbor should be designed, how to address timing differences under the safe harbor, and how to deal with a group’s transitions between the safe harbor and the main GloBE rules.

Interactions of the global minimum tax with the other pillar of the OECD Inclusive Framework agreement relating to profit allocation rules (i.e., Pillar 1) must also be worked out. Specifically, rules must address how the portion of profits allocated to market jurisdictions for taxing purposes (Amount A) is taken into account for purposes of GloBE effective tax rate calculations.

In addition, there are questions about how the interaction of the US global intangible low-taxed income (GILTI) provisions with the GloBE rules. Such questions are likely to remain until the outcome of pending US legislation, aimed at amending the GILTI provisions and bringing them in line with the GloBE rules, is clearer.

Domestic minimum tax and broader BEPS amendments

The UK is also considering adopting a domestic minimum tax, based on the GloBE rules, that would impose top-up tax on UK-based entities of multinational groups. The purpose would be to ensure that additional tax liability arising under the GloBE rules accrues to the UK government, rather than allowing a foreign jurisdiction to collect the top-up tax. The government also contends that this approach would reduce compliance burdens for UK-based groups.

The government states that the global minimum tax cannot replace existing BEPS measures, noting that they address different issues. Moreover, it believes profit-shifting motives are likely to remain as the UK increases its corporate tax rate to 25% (10 percentage points higher than the minimum 15%). Accordingly, the government does not plan a significant overhaul of its BEPS anti-avoidance rules. However, it “is open to considering reform” of the measures to reduce compliance burdens and uncertainty.